Too Funded to Fail: Why Crypto Needs Market Correction to Drive Growth

Source: Blockworks Original Title: Too funded to fail: Crypto needs a forest fire Original Link: https://blockworks.co/news/forest-fire

The Forest Fire Paradox

Arboreal ecosystems operate on a brutal but necessary paradox: For a forest to grow, it occasionally needs to burn. Without these seemingly-apocalyptic conflagrations, the forest floor becomes choked with underbrush, preventing the new growth needed for regeneration and long-term viability.

As noted in discussions about technology cycles, this pattern repeats in innovation sectors. The first web cycle burned through dot-com exuberance and left behind Google, Amazon, eBay, and PayPal—the hardy survivors of Web 1.0. The next cycle, driven by social and mobile, burned again in 2008-2009, clearing the underbrush for Facebook, Airbnb, Uber, and similar success stories.

The speculative frenzy of investment bubbles burns off non-productive capital much like a wildfire consumes dense fuel—and the inevitable crash clears the way for the market’s resources to be reallocated.

The Crypto Problem: Too Funded to Fail

This might be why crypto feels so stagnant this cycle: A tangled undergrowth of big projects that never seem to die has been hoarding the resources the ecosystem needs to evolve.

In traditional economies, labor is constantly being reallocated from failed companies to successful or promising ones. However, this seems to happen less in crypto. Consider Polkadot blockchain, which collected minimal fees recently, yet is supported by 482 full-time developers and 1,404 contributors. If a project in its sixth year of operations was funded by traditional equity rather than tokens, those resources would likely have been released back into the ecosystem by now.

This is problematic because Packard’s Law suggests that “growth in revenues cannot exceed growth in people who can execute and sustain that growth.” If the scarce resource of crypto developers is not being redistributed to successful projects, crypto will struggle to grow.

The Capital Hoarding Problem

Unproductive crypto projects also hoard investment resources. Crypto founders are notorious for over-raising from investors and living off the proceeds, with no market-imposed urgency to find product-market fit.

For example, Golem stockpiled 820,000 ETH in its 2016 ICO, and still held over 230,000 of it as recently as last year. Traditional startup investors expect their capital to be deployed far more quickly than that.

In other cases, projects with large market valuations fund themselves indefinitely by selling their native token from treasury. These protocols collectively sit on billions in capital and have little or no incentive to deploy it efficiently—no activist shareholders to placate, corporate raiders to fear, or quarterly earnings estimates to meet.

Why Bubbles Matter

The benefit of private enterprise is that inefficient projects eventually go out of business. But when projects become entrenched (or heavily funded), the poor performers don’t die—they just become over-engineered and inefficient.

Investment bubbles bring risk back into the equation: “You don’t get upside risk without downside risk.” This might explain why crypto has felt so stagnant this cycle. The ecosystem has plenty of “zombie protocols” with few users and minimal revenue, but lacks the mechanism to let them fail.

The Path Forward

“Growth becomes difficult when everyone’s roots are tangled,” as observers have noted. Until market forces are allowed to work through the tangled roots of over-funded zombie protocols, the nutrients—capital and developers—will remain trapped, and the next era of growth will remain out of reach.

For crypto to achieve sustainable growth, the ecosystem needs to allow the forest fire to burn.